Executives at manufacturing companies have many ways to express how they expect their organizations to perform. Indeed, they regularly issue forecasts that spell out how they see the future unfolding. These forecasts often include predictions about a wide range of variables, which include economic conditions, market trends, customer behavior, and company initiatives. Very rarely, however, do they mention their companies’ plans for managing inventories.

The omission is worth investigating, say HKUST’s Daniel Yang and colleagues. Through an analysis of the inventory activities of more than 25,000 manufacturing company observations (from 2002 to 2018), they observe that a company’s approach to managing inventories could help stakeholders forecast its future sales. They reveal that a notably predictive style of inventory management, asymmetrical inventory management, is practiced by certain companies - particularly those that react more strongly to periods of sales decreases than to periods of sales increases. Within such companies, the authors say, “inventory investment declines less during periods [of] sales decreases than it rises during periods [of] sales increases.”

Instead of choosing to cut production when sales decline, the companies identified in the study maintain inventory levels that would seem to contradict the downturn. Why do they choose this path? Largely, the authors report, to avoid substantial costs that naturally accrue when production is reduced significantly. Such costs are especially high if staff members are laid off, given that layoffs are often accompanied by severance packages and it would prove expensive to recruit new employees should the company increase production in the near future. The authors also remind us that corporate managers are often hesitant about letting inventories dwindle, preferring to minimize the possibility of running out of stock altogether (which would allow competitors to gain ground, among other concerns).

Having identified the existence of asymmetrical inventory management, the researchers design a model to analyze the relationship between inventory adjustments and future sales outcomes. The model’s results show that “managers’ expectations of future demand play a significant role in asymmetric inventory management.” In other words, companies that manage inventories in an asymmetric way appear to signal optimism about their prospects. It follows, the authors argue, that investors and research analysts could benefit from incorporating these signals into their company assessments.

In making their case, the researchers test sales forecasts based on asymmetric inventory management against forecasts based on long-standing traditional benchmarks. Their results suggest that forecasts that incorporate asymmetric inventory management tend to be more accurate than those that do not. This improved level of accuracy provides compelling evidence that a company’s inventory adjustments can provide “incrementally useful information for forecasting sales growth.”

Yang and his colleagues make unique theoretical and empirical contributions, relying on a large sample of observations to yield a novel forecasting tool while invoking an inventory measurement that has not been examined in existing studies. In addition to improving the accuracy of sales forecasts, the authors’ discoveries can help investors and analysts deepen their understanding of how companies make operational decisions about inventories. After all, as the authors write, such decisions “are crucial for successful business operations.”